In his poem "Buried", Michael Ondaatje described an enormous, buried stone Buddha; ancient tree roots creep down, form across the entombed face and, when the statue is finally excavated and lovingly removed, the mass of living tree roots are a perfect cast which retain and echo the serene Buddha's absent visage. This strange subterranean topiary, this subtle shaping by some unseen but organising essence is also at the heart of the strange beauty of Divisadero

Ondaatje's novels are always a worldly, calm but labyrinthine seeking of correspondences; they use the scaffolding of conventional narrative and then kick all support away to discover what can stand alone and what is manifested in new form.

Divisadero begins in the 1970s, prelapsarian, bucolic, then it shifts to rural France, moving between the first world war and today, plundering the spiritual devastation caused by the violence of our relationships and our wars; stories peel, artichoke-like, to reveal one beneath another. The novel is a meditation on the indistinct roots of literary creation itself; it is busy, shifting, but coiled within it are themes of recurrence, of our shaky identities. In the latter sections, these echoes and recurrences gradually coalesce.

Motherless Anna, and the orphans Claire and Coop are raised as brother and sisters by Anna's father on a farm in northern California. This is the first of the many nebulous, subversive, family-like units. Anna, Claire and Coop negotiate the vague peripheries of expected behaviour but as adolescents have become fatally close-knit. Coop becomes 16-year-old Anna's secret lover; Anna's father discovers them in flagrante delicto and Coop is beaten nearly to death while Anna wounds her father. This frank, naked violence is a shattering breach of love, especially since Coop's own family were savagely murdered. Coop and Anna flee, from each other, from Claire and the farm; they change their names and attempt to become invisible.

In his teens Coop allied himself to histories of the gold rush. As a diver, he tended huge pneumatic hoses, desperately sifting river mud for gold. After his cruel expulsion from home he graduates to poker, welcoming that less romantic American seam of gold to be found on the baize tables in Lake Tahoe and Vegas.

Following a dazzling poker sting sequence, Ondaatje conjures a fluent, magically handled moment when, in Lake Tahoe on investigative work for a liberal defence lawyer, Claire randomly takes a pill in a nightclub; coming down, her identity sifted and vague, she stumbles upon Coop by chance. Coop is on the run with the ill-gotten gains from the poker sting, immersed in another, seemingly anonymous, life in which he has fallen for an irresistible junkie, Bridget. Yet again, he is punished for his desires; Bridget is in debt, a doomed front for a sinister gambling group who demand Coop reperform his sting for them. A victim of his cultish fame, Coop refuses and is savagely assaulted - this time beaten into profound amnesia. Claire intervenes and together they return to the farm of their youth to reconcile with their adoptive father and to reconstruct Coop's imploded identity.

Meanwhile, Anna has also been sifting for gold, but in the layered strata of literature, where she encounters the infamous, never-photographed survivor, Caravaggio, from Ondaatje's previous novels In the Skin of a Lion and The English Patient. A scholar visiting the Gers region of France, she is renting the very last home of her biographical subject, the writer Lucien Segura, another victim of his own fame. Anna admits, like Ondaatje, "I am a person who discovers archival subtexts in history and art where the spiralling among a handful of strangers tangles into a story." Segura was a respected poet and diphtheria survivor of the frontline hospitals of 1917, but also the anonymous author of a series of bestselling, deeply loved semi-potboilers, featuring the cult character Claudile - a beautiful young grisette caught in dashing adventures. For Anna, this "modest contrapuntal dance" of the biographer is quite a tango: her lover Rafael is Caravaggio's son and, as a child, knew old Segura himself.

This "spiralling" second half of the book plumbs Segura's creation of the fictional Claudile and is unashamedly colourful, haunted by the first world war, the music of Reinhardt and Grappelli, by Pagnol; it is a homage to the French novel, revelatory of how literary "characters" are slowly invoked from lived reality, creating the spaces, the sure shape of fiction which challenges our own stuttering, shady identities and truths. Lodged skelf-like within Lucien Segura's life and art is one of those distressingly affecting love stories which Ondaatje handles so indefinably - Segura's "ruined love" for the woman on whom he originally modelled Claudile.

She was Marie-Neige, the illiterate child bride who lived on the farm next door in Segura's youth. He read aloud to her; Dumas was their shared passion: the romance of the Musketeers, The Black Tulip. When Segura is blinded in one eye, Marie-Neige learns to read aloud for him, awkwardly at first but, together through their private reading, they share an intimacy more profound, lasting and tender than her hard eroticism with Roman, the older husband. Through literature, like the lovers they cannot become, Segura and Marie-Neige "entered the great world".

Older, unfulfilled and in an unhappy marriage, hopelessly haunted by Marie-Neige, Segura's literary fame is no salve, for he has "slipped into a mistaken garden of celebrity", and like Anna and Coop he seeks refuge to reclaim himself, sacrificing his identity and career as a respected poet to become invisible and write the "lesser" Claudile stories, each a helpless monument to his lost lover Marie-Neige.

The consummation of Segura and Marie-Neige's love had finally come on a brief furlough from the war. Segura's final return to her is as heartbreaking as that helpless, destructive love between Almásy and Katherine Clifton in The English Patient; plumply imagined, deeply romantic but vividly traumatic. Segura deliriously moves through a shattered French landscape back towards his inamorata, weakened by diphtheria. Perhaps all true desire is illicit, but it is a passion which tragically has already consumed itself. It is possible Segura himself infected Marie-Neige on that earlier furlough.

Divisadero, in its melancholy and its joys, probes our insubstantiality, the fragility of our self-constructed identity. Repeatedly, characters mistake one for another. In his inflicted amnesia, Coop mistakes Claire for the lost Anna; in the strange, hallucinatory but exquisitely cruel coda to their love, Marie-Neige mistakes the prodigal Segura for her absent husband.

Divisadero Street is Anna's address in San Francisco. The Spanish root verb can mean both to divide and to "gaze from a distance". Anna realises, "I look into the distance for the people I have lost so I see them everywhere." Ondaatje tenderly fights such loss, and again rescues these strangers to history, forming a cast from their silent lives which we can now look in to.

This novel bravely jostles the uncomfortable edges of literary storytelling; it collapses time and conventional narrative to demand of us as readers or as creators, "What is it we are doing here?" It flags Michel Foucault's beautiful dictum that finally, we write, in order to have no face at all. "As . . . we live those retrievals from childhood that coalesce and echo through our lives, the way shattered pieces of glass in a kaleidoscope reappear in new forms and are song-like in their refrains and rhymes, making up a single monologue. We live permanently in the recurrence of our own stories, whatever story we tell." Alan Warner's latest novel is The Worms Can Carry Me to Heaven (Vintage). To order Divisadero for £16.99 with free UK p&p call Guardian book service on 0870 836 0875 or go to theguardian.com/bookshop